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Friday, March 23, 2007

And this is just the beginning
Posted by Jill | 6:56 AM
Just because you may not be overextended on your own mortgage doesn't mean you won't be affected by the mortgage implosion that is really only just beginning. Take a look around your neighborhood. Have most of the people been there for a while, or are most of them newcomers? Have your more elderly neighbors recently done large improvements after succumbing to the siren song of the mortgage huckster? Is it an older community or a new development? Because if you have a sizable number of people around you who are likely to be stuck with houses they can no longer afford and can't sell, this is what may happen:

SHAKER HEIGHTS, Ohio — In a sign of the spreading economic fallout of mortgage foreclosures, several suburbs of Cleveland, one of the nation’s hardest-hit cities, are spending millions of dollars to maintain vacant houses as they try to contain blight and real-estate panic.

In suburbs like this one, officials are installing alarms, fixing broken windows and mowing lawns at the vacant houses in hopes of preventing a snowball effect, in which surrounding property values suffer and worried neighbors move away. The officials are also working with financially troubled homeowners to renegotiate debts or, when eviction is unavoidable, to find apartments.

“It’s a tragedy and it’s just beginning,” Mayor Judith H. Rawson of Shaker Heights, a mostly affluent suburb, said of the evictions and vacancies, a problem fueled by a rapid increase in high-interest, subprime loans.

“All those shaky loans are out there, and the foreclosures are coming,” Ms. Rawson said. “Managing the damage to our communities will take years.”

Cuyahoga County, including Cleveland and 58 suburbs, has one of the country’s highest foreclosure rates, and officials say the worst is yet to come. In 1995, the county had 2,500 foreclosures; last year there were 15,000. Officials blame the weak economy and housing market and a rash of subprime loans for the high numbers, and the unusual prevalence of vacant houses.

Foreclosures in Cleveland’s inner ring of suburbs, while still low compared with those in Cleveland itself, have climbed sharply, especially in lower-income neighborhoods that border the city. Hundreds of houses are vacant because they are caught in legal limbo, have been abandoned by distant banks or the owners cannot find buyers.

The suburbs here are among the best organized in their counterattack, experts say, but many suburbs elsewhere in the country have had jumps in foreclosures and are also working to stem the damage.

Outside Atlanta, Gwinnett and DeKalb Counties have mounted antiforeclosure campaigns while several towns south of Chicago are forcing titleholders to fix up empty houses, or repay the government for doing it.

Here in Ohio, there are more than 200 vacant houses in Euclid, a suburb of Cleveland north of here. In the last two years more than 600 houses in Euclid have gone through foreclosure or started the process, many of them the homes of elderly people who refinanced with low two-year teaser rates, then saw their payments grow by 50 percent or more.

Euclid has installed alarm systems in some vacant houses to keep out people hoping to steal lights and other fixtures, drug users and squatters. The city has hired three new building inspectors, bringing the total to nine, to deal with troubled properties and is getting a $1 million loan from the county to cover the costs of rehabilitation, demolition and lawn care at the foreclosed houses. (When the properties are sold, such direct maintenance costs will be recovered through tax assessments.)

The Euclid mayor, Bill Cervenik, said the city, with a population of 53,000, was losing $750,000 a year in property taxes from the empty houses.


And this is how entire communities die. Abandoned, boarded up homes, a declining tax base -- at that point it doesn't matter if you have a 5-percent, 15-year mortgage that you keep up to date and no credit card debt. When an entire community dies around you, no matter how careful you are, your own neighborhood, your own quality of life is endangered.

Remember how everyone worshipped the ground on which Alan Greenspan walked? Well, if you want to lay the mortgage debacle at the foot of someone, he's as likely a candidate as anyone. Here is what he said at the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. on April 8, 2005:

A brief look back at the evolution of the consumer finance market reveals that the financial services industry has long been competitive, innovative, and resilient. Especially in the past decade, technological advances have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants.

[snip]

Home mortgage loans, as we know them today, are a fairly recent product born of the failures of the mortgage finance system during the Great Depression. Clearly, radical change was needed. One of the most significant responses to this need was creation of the Federal Housing Administration, which instituted a new type of mortgage loan--the long-term, fixed-rate, self-amortizing mortgage--which became the model that transformed conventional home mortgage lending. A whole industry--thrift institutions--grew up around this one product.

[snip]

As has every segment of our economy, the financial services sector has been dramatically transformed by technology. Technological advancements have significantly altered the delivery and processing of nearly every consumer financial transaction, from the most basic to the most complex. For example, information processing technology has enabled creditors to achieve significant efficiencies in collecting and assimilating the data necessary to evaluate risk and make corresponding decisions about credit pricing.

With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.

[snip]

Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits. Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes. Access to credit has enabled families to purchase homes, deal with emergencies, and obtain goods and services. Home ownership is at a record high, and the number of home mortgage loans to low- and moderate-income and minority families has risen rapidly over the past five years. Credit cards and installment loans are also available to the vast majority of households.


Yes, folks, that was Alan Greenspan, the Patron Saint of Republinomics, extolling the virtues of granting tons of credit to those least capable of ever paying it back.

If the monied interests in this country had outright conspired to tantalize working-class Americans with the American dream and build the mechanism to pull the rug out from under them right into the system, they couldn't have done a better job of it. It would be beautiful in its simplicity were it not for the fact that real people's economic lives are being ruined beyond repair.

It's hard to have sympathy for those who tapped out all their equity and then some to pay for six-figure kitchen remodels, or new SUVs for everyone in the family, or home theatres and indoor pools. It's hard to have sympathy for those for whom a 1950's ranch house wasn't good enough, they had to tear it down and build a 4500 squre foot house so that no kid should have to share a bathroom, and now find themselves with a white elephant they can't afford and can't sell. But when homeownership has been set forth as an ideal for generations, and "creative" mortgages seemed to offer a way for people of modest means to buy modest houses, it's hard to fault those who saw these mortgages as a way to no longer be dependent on the good graces of landlords.

(hat tip: The Big Picture)

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